Dollar down after Fed statement as fewer rate hikes seen

By Dion Rabouin

3 Min Read

A clerk uses a machine to count Chinese yuan (bottom L) and U.S. dollar banknotes at a branch of Bank of China in Taiyuan, Shanxi province, China, January 4, 2016.Jon Woo

NEW YORK (Reuters) - The dollar fell against a basket of major currencies on Wednesday following the Federal Reserve's decision to keep its overnight interest rate unchanged and the release of a statement suggesting it was re-evaluating the pace of future hikes.

The statement highlighted concerns about global growth, saying the U.S. central bank's governors would be "closely monitoring" global economic and financial developments, but also maintained a generally positive view of the U.S. economy.

In December, the Fed set a path of four rate increases this year, likely bringing the U.S. overnight interest rate to 1 percent.

Maintaining that path of rate hikes would likely help the dollar against lower-yielding currencies such as the yen and the euro and make it a more attractive currency for investors.

Fed fund futures, however, implied markets expect just one rate hike this year. That put Wednesday's statement squarely in the spotlight.

"The statement definitely gave some nod to the slowdown in U.S. growth and to some of the risks emanating from overseas, but it doesn't seem like they've drastically reassessed their outlook for the U.S. economy," said Ian Gordon, G10 FX strategist at Bank of America-Merrill Lynch in New York.

"From that standpoint, overall I'd say this is dollar neutral."

The dollar whipsawed up and down against global competitors immediately after the statement's release, but overall moved lower.

The dollar index fell 0.4 percent to 98.957, off nearly a cent from a seven-week high of 99.799 set on Thursday.

The euro rose to its highest in six days against the dollar, touching a new session high of $1.0915 after the statement's release . It was last up 0.2 percent at $1.0891.

The dollar added 0.2 percent versus the yen to 118.67 yen .

Analysts said that while the Fed may not have said so, its statement likely backed investors' suspicions that it is unlikely to make four rate hikes this year.

"This air of caution with respect to global developments, that does hint at a higher bar for a Fed rate hike in the coming months," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"We'll have to see how global developments fare ..., but I think (the Fed's statement) adds credence to market views that fewer, instead of more, rate hikes appear on the table for the Fed this year."